President Donald Trump’s threat to ratchet up US import tariffs on Chinese goods has led to renewed investor turbulence this week, sparking the worst single-day decline in both the Hang Seng (-2.78%) and the CSI 300 (-3.53%) since February. Heated rhetoric has continued, with a White House official warning that “predatory” China had “much more to lose,” while Chinese state media accused the Trump administration of having “blood lust.”
While souring sentiment could add to volatility, we see several reasons for investors to retain China equity exposure:
- We expect positive fundamentals to support further upside for Chinese stocks. MSCI China consensus EPS growth is 17% y/y, one of the highest in the region. And on a valuation basis, MSCI China is now trading at 13x 2018 P/E, a low this year.
- The initial USD 50bn list of Chinese goods to be targeted from 6 July consists of goods largely unrepresented on the benchmark China equities indexes. With only 2% of MSCI China's revenues coming from the US, the fundamental impact on Chinese offshore equities is likely to be limited.
- Beijing has made clear that it is ready to offer policy support, with a central bank paper advocating a RRR cut and its governor pledging to ensure “reasonable stability,” while state media has offered wall-to-wall optimistic commentary on the market. This verbal support appears to have helped stabilize Chinese equities on 20 June.
While an escalation of US protectionism could damage market sentiment in the country, and volatility may remain high in the near term, we believe fundamentals are strong enough to counterbalance current trade tensions. We see scope for further regional equity upside, and continue to prefer China within our Asia portfolios.
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